I had the pleasure of speaking with Rick Darling, president of LF USA, following his terrific keynote presentation at the International Licensing Expo. LF USA is a subsidiary of Hong Kong-headquartered Li & Fung Limited, the multinational consumer goods export and logistics group. Darling oversees LF USA’s rapidly expanding business in the U.S., where its portfolio of owned and licensed brands includes top entertainment companies, celebrity brands and fashion labels. A key partner to the world’s major department stores and mass retailers, LF USA combines innovative design, merchandising expertise, and deep retail relationships with Li & Fung’s global sourcing platform to strengthen world-class brands.

In the first of two parts, Darling discusses the global retail landscape including emerging formats, localization and sustainability and their impact on licensees and licensors.

Carol Spieckerman: For years, people have been saying that the US market is over-stored. You echoed that in your presentation and assigned a percentage to it, saying that it could be by as much 20%. I’d like your thoughts on small-format growth in the U.S. Dollar General alone is set to open over 600 units this year, Aldi is opening close to 100, and of course there are Walmart’s Express concept and City Target as well. Is there room for all of these stores?

Rick Darling: The new formats that you’re talking about from Walmart, Aldi, Target, and the various big-box guys are really based on two things. First, it’s a reaction to the fact that from a big-box standpoint, they are over-stored. That said, these stores can’t stop growth. What the new format does is provide an innovative way to reach more customers and take market share, and it’s a way to get closer to their customers. Even though I believe that the country is over-stored, it doesn’t mean that there isn’t room for innovative concepts, even if the overall retail market isn’t going to grow. Big-box retailers will take market share from other concepts including their own. I believe that they will cannibalize their own businesses to some degree, and I think that they’re also willing to do that to be able to get into these new formats. The fact that you have too much overall retail doesn’t mean that new emerging ideas won’t be accepted; they will just be a projection of the existing retail space.

Spieckerman: Do you think that if these newcomers to the small-format space figure out the efficiencies and what works and doesn’t, it will give them a leg up in the emerging markets that, previously, may have proved elusive or difficult to penetrate?

Darling: Definitely. I believe that the smaller-format stores are going to be incredibly useful. Tesco has been deeply committed to their Fresh & Easy concept now for about five years. They opened stores and then stopped, so people started criticizing them and saying that maybe it wasn’t working. That was almost a breather period for them to identify what worked and what didn’t, and now they’re opening again. So I think these formats accomplish two things. In the developed marketplace in US and Western Europe, they allow retailers to put reasonably-sized stores in communities where they can’t build a bigger box, which is number one. Number two, it’s very relevant when you start thinking about South America, Brazil, India, other parts of the world where you still have large rural markets. The whole small-store format is an innovation that’s here to stay. These guys will fine-tune it over the next five or ten years and, eventually, it could become a very important part of their business in the overall retail scene.

Spieckerman: All of a sudden, people are finally paying attention to dollar stores. Walmart has openly acknowledged that they’ve taken a bite out of their market share, and I’m sure they’re taking a bite out of the market share of others’ that aren’t as forthcoming about it. What are your thoughts about the dollar channel in general and do you see the gains that they’ve made as a temporary dynamic or as a longer-term shift?

Darling: I think that the dollar stores are just now being recognized as a channel, and I believe that the channel’s here for the long term. I think what they have done is what the big-box guys are now trying to do – build smaller-format stores that are more product-specific in local, closer, smaller markets. That’s one of the driving factors behind the bigger guys opening up these concepts. So now, Dollar General, Family Dollar, and the whole group are going to be faced with competition; direct competition in their channel, from Walmart, Target, Tesco, Aldi, and the rest of those guys. The channel is here to stay, but it’s a channel that has emerged over the last ten or twenty years and is just now being recognized. Now that the channel has established itself, the other players are going to jump in.

That said, Dollar General, Family Dollar – those guys are thousands of stores ahead of the new players so they have a pretty defensible position. But I wouldn’t for a moment say that they own a position exclusively. They’re going to face tremendous competition because the format does work.

Spieckerman: In your presentation, you talked about a lower-margin, higher-cost environment that the retail industry will be in for an undetermined amount of time. How do you think dollar stores are going to fare in that environment?

Darling: I think they’ll deal with it the same way all of the retailers do. They’ll find ways to be more efficient. They may have to raise their prices in certain product categories. The dollar stores are not locked to a dollar; they have the ability to go up and down a little bit as they need to. They’ll play that and adjust the mix to allow to them get around the problem.

Spieckerman: In your presentation you talked about localization from a global branding perspective and about localizing not just the product assortments, but also right down to having design execution based in particular countries and particular regions. How do you see localization playing out globally and domestically, as retailers such as Macy’s, with its My Macy’s program, make larger percentages of assortments completely unique to each store?

Darling: It’s different for the U.S. than it might be for rest of the world. Localization in the U.S. is something that’s become very important for every major retailer, whether it’s My Macy’s, Kohl’s, J.C. Penney, or any of the other retailers. Every one of them now has a regional purchasing program. The difference is that for the most part, the product is not being individually designed for regions within the United States – it’s more of an assortment-planning process.

So the individual regions and local areas may be merchandising the available products differently, but not redesigning them for those regions. Instead, there could be timing issues that are now being looked at deeply, in terms of seasonality. It could be assortment in terms of long sleeves versus short sleeves, or nuances in the merchandising mix. US localization has really meant taking national chains back to the day when there was regional influence to make sure that the mix in a particular part of the country is appropriate for that part of the country. For the most part, they’re not redesigning the products for each part of the country.

Spieckerman: In terms of minimums, do you see the fact that all-store buys and all-store inventory planning will be limited going forward as a shake up, and have you already seen that taking shape?

Darling: I think it’s already taking shape and it’s a required part of doing business with a national chain today. If you are a supplier to a national chain, you need a supply chain of your own that allows you to have that flexibility. That means more styles and smaller quantities, shifting and assigning styles to be shipped to different parts of the country at different times, and also having an in-house capability to take in regional information, dissect it, and use it with your buyers to build the business. If anything, what that does is require suppliers to get much better at building their own supply chains. I think people are doing that and there are a lot of good suppliers that sell to national chains, so it’s becoming almost an assumed capability.

Outside of this country, it’s a different story. You can’t take a U.S.-designed brand, plunk it down in Germany as is, and expect that you’re going to get the sell-throughs that you might like to get in that market. You have to localize that product to some degree, depending on the country and the region. Even in Western Europe, which is probably the most comparable to the U.S., localization, whether it’s fit or color mix, is required. You can maintain the brand DNA but somebody on the ground who understands that market has to tweak that line to make it appropriate for that local consumer. In our view, without that, you really can’t expand a brand globally.

Spieckerman: So it sounds like from a global perspective, it’s much more a design-driven sensibility and in the U.S. market, it’s much more about assortment planning?

Darling: That’s exactly right.

Spieckerman: In the U.S. market, localization has driven some retailers to favor local suppliers in some cases, and to ensure that particular stores have a community flavor by featuring local brands. This also ties into sustainability, because it lowers fuel and transportation costs. Is local sourcing and favoring local suppliers a significant movement and is Li & Fung participating in any way?

Darling: It’s a significant movement and, although we’re not in the food business yet, it’s particularly significant in that business, and I believe that it’s going to become more significant over the long term. The food supply chain is localizing very quickly. It has to do with two components. One is the efficiency and environmental impact of moving food long distances. The other is the breakdown in the nutritional value of food when you move it long distances. People are concerned with both. Buying a tomato in a particular region of the country and moving it three days across the country has a significant impact on quality and nutritional value. People are becoming more and more aware of that. Obviously, it also takes a lot more energy to do it, so in the food market, there is a significant movement going on, here and in other parts of the world, to localize the food supply chain.

I have a son who is in the restaurant business in Hong Kong and he runs a New York-style Italian restaurant. He also owns a farm in China. He picked up on the story back about three years ago, even in Hong Kong, that people were getting tired of the poor quality produce and the waste of time that it took to get to Hong Kong and the whole sustainability issue. He developed his business into a home delivery and wholesale system that provides organic, naturally-grown heirloom vegetables that are grown three hours from the restaurant and delivered every day.

To go to general merchandise for a second, if you’re living in the southeastern U.S., you might love to have your toys made there to save energy but they’re not getting made there. I don’t think there’s anything we’re going to be doing to build apparel factories in the United States to save energy. So when it comes to sustainability and localization with apparel and other general products, you have to look at your overseas supply chain and figure out how to continue to make it more effective and more efficient so that people get the product faster and in a lot more environmentally-friendly way. I just don’t see the localization movement that we’re talking about resulting in big amounts of general merchandise products being made back in a local country.

Part 2 of our exclusive interview with Rick Darling, covering licensing best practices, emerging markets and Li & Fung growth strategies, will be posted here in the near future.